Iraq - Growth and Structure of the Economy

Growth and structure of the economy

In the 1960s, investment in industry accounted for almost one-quarter of the development budget, about twice the amount spent under the monarchy in the 1950s. After the 1968 Baath revolution, the share allocated to industrial development grew to about 30 percent of development spending. With the advent of the Iran-Iraq War, however, this share decreased to about 18 percent. Development expenditure on agriculture fell from about 40 percent under the prerevolutionary regime to about 20 percent under the Baath regime in the early 1970s. By 1982, investment in agriculture was down to 10 percent of the development budget.

Total Iraqi GDP, as well as sectoral contribution to GDP, could only be estimated in the 1980s. On the eve of the Iran-Iraq War, the petroleum sector dominated the economy, accounting for two-thirds of GDP. The outbreak of war curtailed oil production, and by 1983 petroleum contributed only one-third of GDP. The nonpetroleum sector of the economy also shrank, and, as a consequence, total real GDP dropped about 15 percent per year from 1981 to 1983. To a lesser extent, nominal GDP also shrank, from about US$20 billion to US$18 billion, an indication of high wartime inflation. The decline in GDP was reversed between 1984 and 1986, when oil production grew at about 24 percent per year as the government secured outlets and resumed exports. But over the same period, the nonpetroleum sector of the economy continued to contract by about 6 percent per year, offsetting gains from increased oil production. In 1986, the petroleum sector revived to the extent that it contributed about 33.5 percent of GDP, while the nonpetroleum sector, including services, manufacturing and agriculture accounted for the remainder. Business services, the largest component of nonpetroleum GDP, amounted to about 23 percent of GDP. Agriculture accounted for about 7.5 percent of GDP, mining and manufacturing for slightly less than 7 percent, construction for almost 12 percent, transportation and communications for about 4.5 percent, and utilities for between 1 and 2 percent. The total estimated GDP for 1986 was equivalent to US$35 billion.

Projections based on economic trends indicated that total GDP would grow about 6 percent annually over the five-year period from 1987 to 1991. In fact, however, 1987 GDP was estimated at a 1.7 percent real growth rate. The petroleum sector would continue to grow, although at a slower rate of about 8 percent per year, and it would account for more than half of GDP. The nonpetroleum sector was expected to resume modest growth in 1987. Construction would be the fastest growing sector, at about 7 percent per year. Agriculture would grow only marginally, and therefore its share of overall GDP would decline from 1986 levels. Other nonpetroleum sectors would grow at a rate of between 3 and 4 percent per year and, because these projected growth rates were smaller than the overall GDP growth rate, would likewise decline as a percentage of total GDP.

In early 1988, Iraq's total external liabilities were difficult to determine accurately because the Iraqi government did not publish official information on its debt. Moreover, Iraqi debt was divided into a number of overlapping categories according to the type of lender, the terms of disbursement or servicing, and the disposition of the funds. For example, some loans were combined with aid grants in mixed credits, and some loans were authorized but never disbursed. And, in a process of constant negotiation with its creditors, Iraq had deferred payment by rescheduling loans. Finally, some loans were partially repaid with oil in counter-trade and barter agreements. Nevertheless, experts estimated that Iraqi debt in 1986 totaled between US$50 billion and US$80 billion. Of this total, Iraq owed about US$30 billion to Saudi Arabia, Kuwait, and the other Gulf states. Most of this amount was derived from crude oil sales on Iraq's behalf. Iraq promised to provide reimbursement in oil after the war, but the Gulf states were expected to waive repayment.

A second important category of debt was that owed to official export credit agencies. The authoritative Wharton Econometric Forecasting Associates estimated in 1986 that Iraqi debt guaranteed by export credit agencies totalled US$9.3 billion, of which US$1.6 billion was short-term debt and US$7.7 billion was medium-term debt.

In the category of private sector debts, Iraq owed up to US$7 billion to private companies that had not secured the trade credit they extended to Iraq with their government export credit agencies. The firms that were owed the most were based in Turkey, in the Republic of Korea (South Korea), and in India, which lacked access to official export credit guarantees. European companies were also owed large amounts. By the late 1980s, Iraq had placed a priority on settling these private sector debts. In addition, Iraq owed an estimated US$6.8 billion to commercial banks as of mid-1986, although much of this sum was guaranteed by government export credit agencies.

In the realm of government debts, Iraq had accrued considerable debts to Western governments for its purchases of military materiel. Iraq owed France more than US$1.35 billion for weapons, which it was repaying by permitting Elf-Aquitaine and Compagnie Franšaise des Petroles-Total (CFP)--two oil companies affiliated with the French government--to lift 80,000 barrels of oil per day from the Dortyol terminal near Iskenderun, Turkey. Finally, Iraq owed money to the Soviet Union and to East European nations. Iraq's debt to the Soviet Union was estimated at US$5 billion in 1987.